Why now may be the best time to buy gold in the UAE

Dubai - Why the precious metal is shines as hedge against GCC markets volatility

The GCC stock markets' performances over the last year was nothing less than mercurial. The Saudi Stock Exchange rolled a 52-week high of 7,290 at the beginning of 2017, and a low of 5,327 in October 2016.
Matching the trend towards volatility were the Kuwait and Qatar stock exchanges. The Kuwait Stock Exchange climbed a 52-week peak of 6,980 points in January 2017, and dropped to the depth of 5,173 points in February 2016. In August 2016, the Qatar Stock Exchange rose to 11,408 points from a low of 9,512 points in June 2016. The Gulfbase GCC Index tumbled to a 52-week low of 3,775 points in October 2016, soaring to a high of 4,494 points in the first month of 2017.

A strong driver of the volatility in the equity markets centred around the speculation and concerns over crude oil prices. Until the Opec took the plunge and intervened to cut oil supplies at the end of 2016, cautious investors focused on profit-taking. The Tasi's energy sector fluctuated heavily; the benchmark went through a 52-week low of 3,459 versus a high of 5,259. The same trend is reflected across the Gulfbase GCC Index; energy stocks performed like mountain climbers, peaking at a 52-week high of 2,038 points and rappelling down to a low of 1,812 points.
It's clear that GCC equities have stabilised since the beginning of the year. Energy stocks are gaining ground amid expectations that the Opec intends to keep reducing oil production. Apparently, investors are more confident that crude oil prices will keep recovering. Yet, crude oil prices are stubbornly hovering around $50-$55 per barrel. This is falling short of the Opec's goal of $60, at least for the time being.
Holding the energy prices down are several factors. On a global level, the Opec has competition in the form of US shale oil. And it will take some time - until the end of 2018 - until stockpiles are at the draw-down stage. This has the effect of capping international crude oil benchmarks, in spite of the supply reductions.
For the moment, I don't see a strong argument for being anything but neutral on equities. This is because earnings aren't likely to improve dramatically from 2016. Governments continue to cut budgets amid economic restructuring to reduce oil industry reliance. Privatisation is the new trend, and GDP growth - while stable - isn't stellar or robust in the short term. Weaker fundamentals like slower growth are leading to trimmed risk appetite. The tighter credit conditions aren't conducive to growth and investment.
Business sentiment is much changed since pre-2008 sentiment. GCC companies are going through their own reforms and adapting to austerity conditions. The stronger dollar is another challenge to exporters' profits and turnover. GCC currencies are pegged to the dollar, which is markedly more bullish at the time of writing. A higher dollar means more expensive goods for export. It's also another headwind for the crude oil export prices.
Keeping all this in mind, when investing in GCC equities, the wisest approach is to be very selective and tactical. A pivotal part of an equity strategy in these circumstances is to use gold as a hedge. I believe that gold is one of the best hedges against volatility, currency and upcoming political risks in the first half of 2017. A hawkish Federal Reserve is strengthening the dollar on the back of rate hike expectations, but that hasn't deterred gold bulls. Its recent high of $1,260 per ounce supports the view that the precious metal keeps shining as a hedge against uncertainty. Some factors will play against gold, such as tightening monetary policies and rising yields. But what matters most is real - not nominal - interest rates.
That's not to say that investors should go all-in on gold. The idea is to make sure the portfolio has enough exposure to the yellow metal as a way of balancing out uncertain returns in equities. Common investments in gold can be through the physical metal, or mining companies, for example. GCC equity markets, while a good long-term bet, are still heavily reliant on the crude oil industry. As long as energy stocks are in the recovery phase, investors are well-advised to keep their choices diversified and hedged.
The writer is the chief market strategist at ForexTime. Views expressed are his own and do not reflect the newspaper's policy.

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